1. In this reference, the following question stands referred to us :
'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that a single assessment for the whole period from November 3, 1967, to October 21, 1968, could not be made for the assessment year 1969-70 ?'
2. A few facts may be stated. The assessee is a firm carrying on the business at Kolhapur in the name and style of E. H. Kathawala & Co. It carries on business in jaggery and acts as commission agents. It was first constituted under a deed of partnership executed in October, 1949. From time to time, the constitution of the firm has undergone various changes. We are concerned with the two partnership deeds, one dated October 30, 1963, and another dated March 14, 1968.
3. The first of the two deeds, that is the one of 1963, records that six persons named therein were carrying on business in partnership of whom one Shamji retired on October 17, 1963 (which is the end of S.Y.). The deed further records that the five continuing partners have agreed to continue the business in the very name and style and their shares in the profits and losses are set out in clause 6 of the deed. One of these partners was Ramji Keshavji who had a share of 14 paise in a rupee.
4. It would appear that this partner, Ramji Keshavji, expired on February 24, 1968, and on March 14, 1968, a fresh partnership deed was entered into by the four surviving partners and two new partners, viz., Khimchand Ramji and Nagji Hirji. The shares of the respective partners in the firm were readjusted. The name suggests that Khimchand presumably was the son of the said Ramji. Nagji Hirji, however, who was given 17.50 paise share does not appear to be a relative of Ramji. If at all, he may be related to Premji Hirji, who had a major share under the earlier partnership deed.
5. For the relevant assessment year, that is, 1969-70, the assessee filed two returns of income in the name and style of Messrs. E. H. Kathawala & Co., Kolhapur, for the two broken periods. The first return was for the period from November 3, 1967, to February 24, 1968, and the second return was for the period from February 25, 1968, to October 21, 1968. The ITO acted on these returns and made two separate assessments for the aforesaid two specified periods.
6. The Additional Commissioner, in the purported exercise of his revisional jurisdiction under s. 263 of the Act, cancelled the two assessments and directed the ITO to make a single and consolidated assessment for the entire period from November 3, 1967, to October 21, 1968.
7. The assessee did not accept the order of the Addl. Commissioner and went by way of an appeal to the Tribunal. Before the Tribunal, it was contended on behalf of the assessee that there was a dissolution of the firm on the death of Ramji and no question of a change in the constitution. On the other hand, on behalf of the Revenue, it was contended that various circumstances showed that the firm had continued with the same business with the same goodwill and with the same assets and liabilities after the death of Ramji Keshavji. These circumstances were, according to the arguments of the departmental representative, that the profit and loss account was not made up and the balance-sheet was not struck on the death of the said partner. No deed of dissolution was executed among the surviving partners evidencing the factum of dissolution. On the other hand, on behalf of the assessee, it was pointed out that the new firm was registered with the Registrar of Firms. Two separate returns were filed accompanied by two application claiming registration for each of the firms. The Tribunal upheld the contentions advanced on behalf of the assessee and allowed the appeal. Aggrieved by the decision of the Tribunal, the present reference has been made at the instance of the Commissioner.
8. When the reference came up for hearing before us on an earlier occasion, we found it necessary to have before us the partnership deed of October 30, 1963, as well as the subsequent partnership deed of March 14, 1968. By consent, a supplementary paper book has been put in and these two deeds are directed to be treated as annexures 'D' and 'E', respectively, to the statement of case.
9. In the partnership deed dated October 30, 1963, we do not find any express provision to the effect that the firm is not to be dissolved on the death of a partner nor any other provision for valuing the share of a deceased partner or indicating mode of payment thereof to his heirs or to his estate. However, in the later deed of partnership, viz., the one dated March 14, 1968, there is a recital that on Ramji's death the surviving partners have taken over the business as also the assets and liabilities of the old firm and have taken two new partners. As mentioned earlier, there was a refixation of the shares of the partners resultant upon the induction of these two new partners. The short question is whether there has been succession of one firm by another or a mere change in the constitution of the firm covered by the provisions contained in s. 187 of the I.T. Act, 1961. Section 187 provides that where it is found that a mere change has occurred in the constitution of a firm, the assessment is to be made on the firm as constituted at the time of making the assessment. On the other hand, where a firm has been succeeded by another firm and the case is one not covered by s. 187, separate assessments are required to be made on the predecessor firm and the successor firm.
10. In our opinion, the legal position will have to be ascertained with reference to the provisions of the Indian Partnership Act. Section 42 of the Indian Partnership Act provides that a firm is dissolved by the death of a partner, but this is made subject to a contract to the contrary between the partners. We have already mentioned that we find no express provision, i.e., a contract to the contrary, in the partnership deed dated October 30, 1963. However, it has been observed that such a contract need not be expressed but may be inferred from the conduct of the parties and the other facts and circumstances. Ordinarily, the contract must be one between the original partners. However, the conduct of the surviving partners and the heirs of the deceased partner, after his death, may reflect the original intention of the founders of the partnership. The taking up as a partner of a son of the deceased partner in his stead and the continuation of the firm without dissolution is not an uncommon feature of partnerships in this country.
11. What do we find in the present case It is true that Khimchand (a son of the deceased partner) appears to have been taken up as a partner under the later deed of March 14, 1968, but has been given a reduced share in the profit and loss and not the identical share of his father. Again, we have the induction of a new partner and a complete reallocation of the shares of the other partners.
12. There must be satisfactory and cogent evidence available on the record to show that the partners had agreed or must be deemed to have agreed that the death of any one of them would not result in the dissolution of the firm. The court must not readily infer that death of a partner would not result in the dissolution unless the facts and circumstances of the case are such as to clearly indicate that such an inference must be drawn. If the question is simply posed in this manner, it is not possible to hold, in the instant case, that such an inference was required to be drawn. Merely because the surviving partners choose to carry on the business without providing for the share in the assets and profits of the deceased partner would not justify such an inference being drawn. Similarly, the fact that one of the sons of the deceased partner had been inducted as a partner though given a lesser share would not seem to carry the matter much further. Once it is held that a contract to the contrary is not proved or could not be properly inferred, then it would have to be held that on the death of Ramji, the firm constituted under the deed of partnership dated October 30, 1963, stood dissolved. If the firm stood dissolved, then there was no mere change in the constitution of the firm, when two new partners were inducted. What was done in March, 1968, must legitimately be considered as succession of one firm by another. If that be so, it will have to be held that the view taken by the Tribunal was the correct view.
13. It has been pointed out that there are a number of decisions dealing with changes in constitution of a firm. In our opinion, however, the correct legal position will have to be ascertained with reference to the provisions of the Indian Partnership Act and the decision given must rest on the particular facts of each case. These decisions then may not have any general application and need not, therefore, be considered in detail.
14. In the result, the question referred to us is answered in the affirmative and in favour of the assessee. The Commissioner to pay the costs of the reference.